Changing Interest Rates

Oct 1, 2018
October 2018

RECENTLY, FEDERAL RESERVE Chairman Jerome Powell suggested he expects the Federal Reserve to continue gradually raising interest rates if the U.S. economic expansion remains strong. The Federal Reserve has a target 2 percent rate for inflation. At this time the economy is growing at close to that rate, and customarily that means the Federal Reserve will vote to increase interest rates. Why would it mess with a good economy? Many people ask that same question — President Trump is one of them. Chairman Powell’s stated goal is to strike a balance, maximizing employment and keeping price increases stable. So what is the big deal if interest rates are increased?

When workforce wages rise, these costs are frequently passed on to the customers via a higher sales price. This increased pricing then can create inflation, creating a need to increase interest rates, which could cause a recession. In a recession, not as many tax dollars are collected, and that negatively impacts the government’s budget.

Interest rates come into play in a business setting when an entity wants to borrow money to help it in one of a variety of ways. It could borrow money because it is a seasonal business, it may want to purchase new equipment for its operations, or it may even want to purchase a business. When interest rates are increased, it reduces the amount of borrowing a business does. This frequently has the effect of slowing the economy, as businesses tend to become a bit more conservative and become spectators as they assess their future.

Increased interest rates not only impact the growth of businesses but also make them a little less profitable as their expenses increase as they pay more interest dollars on their loans due to a higher interest rate. Increased interest rates also impact employment, and generally it is a negative impact. If businesses aren’t borrowing money to grow their businesses or to purchase new equipment, odds are they are not hiring more employees and, potentially, are reducing their workforce.

So while you may not pay much attention to “something that does not impact you,” interest rate changes truly impact everyone in one form or another. Our Federal Reserve team really has a lot to consider when deciding on interest rate changes, both up and down. They study a significant amount of data to arrive at their conclusion, knowing they have to think about our entire economy. That little old interest rate really is darn important and merits our attention. It is a harbinger of things to come.

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